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Will France's Conservatives Get It Right This Time?

June 09, 2002

Spring is a notoriously unpredictable season in France. But there's no doubt which way the political winds are blowing this year. Polls show that President Jacques Chirac's center-right coalition is poised to win parliamentary elections on June 9 and 16, ending five years of Socialist control. In that event, the interim government headed by Prime Minister Jean-Pierre Raffarin, appointed by Chirac after former Socialist Premier Lionel Jospin resigned on May 6, will remain in place. Raffarin and his ministers are already busy with plans to overhaul law enforcement agencies, cut income taxes, and relax a Socialist-engineered law that mandates steep overtime payments by employers for workers that work more than 35 hours per week.

That's just the easy stuff, though. The question now is how the conservatives will tackle economic reforms that are far more controversial but also urgently needed to restore France's lagging competitiveness. Chirac and Raffarin have promised to act on such touchy issues as privatizing government-owned companies, slashing the public-sector bureaucracy, and reforming the pension system, but they've offered few details. And with good reason: The last time conservatives took control of the government, in 1995, they were tossed out within two years. Then-Prime Minister Alain Jupp?'s efforts to cut government spending sparked nationwide protests. Thus the key challenge for Chirac & Co. is salesmanship, says Maurice Levy, chief executive of French advertising giant Publicis Groupe. "Jupp? made the right decisions, but there was a certain arrogance. He was so sure he was right, he didn't talk to the people," says Levy, who believes the Raffarin government won't repeat that mistake.

Early signs are encouraging. Raffarin has already held friendly meetings with labor and business leaders to solicit their opinions on reform. The 53-year-old former regional government official has a populist streak that sets him apart from predecessors, both Socialist and conservative. Neither he nor his new Finance Minister, Francis Mer, is an ?narque--a graduate of the Ecole Nationale d'Administration, the elite training ground for the country's political leadership. Mer, 63, is former chairman of steelmaker Arcelor, where he won plaudits for engineering the crossborder merger that created the world's No. 1 steel company. He's the first businessman ever to serve as Finance Minister. Such credentials play well with French voters, who are increasingly frustrated with career politicians.

Certainly, the new government has its work cut out for it. France has largely resisted the tide of tax cutting and deregulation that has swept Europe in recent years. The conservatives have pledged to relax labor laws and cut income taxes by 33% over the next five years. They're also likely to speed up privatization, selling more shares in partially privatized companies such as Air France and Thomson Multimedia.

An even bigger prize, coming as early as next year, may be a public offering of a minority stake in Electricit? de France. One of the few European electric utilities that's still entirely government owned, EDF has an estimated market value of around $50 billion. With conservatives in power, "some things that were considered untouchable may come onto the table," says Sami L. Toutounji, a Paris lawyer at Shearman & Sterling who specializes in privatization.

Tax cuts are an even more pressing issue. Payroll taxes and other levies make France's effective corporate tax rate the highest in Europe outside Scandinavia. But the government can't easily slash taxes because France is already in danger of breaching its pledge to fellow euro-zone members to erase its budget deficit by 2004. "France's growth is going to continue to lag until they get serious about cutting public spending," says Marc L. Touati, an economist at Banque Natexis Populaire in Paris.

Yet some things are working in the conservatives' favor. The French economy is recovering momentum and is expected to grow 1.5% to 2% this year. That could ease some of the pressures on the new government. And for now, Raffarin has the public rooting for him, with polls showing his approval rating over 60%. Maybe, just maybe, the winds of political change could set France on a new economic course. By Carol Matlack in Paris